Appeals Court Opens The Door For Workplace Arbitration Agreements

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California businesses scored a win in a recent court ruling that allows them to once again require workers to sign mandatory arbitration agreements to resolve work-related disputes.

The Ninth Circuit Court of Appeals’ February 15 decision ruled the Federal Arbitration Act preempts Assembly Bill 51, which would have barred employers from requiring such agreements.

It has broad implications for businesses looking to avoid costly payouts for claims related to such issues as discrimination, wrongful termination, sexual harassment, personal injury and wage violations.

“This eliminates some of the threat of runaway verdicts,” said Corinne Spencer, chairwoman of the Labor and Employment Practice Group at Pearlman, Brown & Wax LLP. “It can also destroy the threat of class-action lawsuits.”

For businesses, the advantages are clear — no judge, no jury and no courtroom, along with a faster resolution, lower costs and a binding decision.

But that’s not saying workers necessarily favor arbitration agreements. Spencer said many new hires probably don’t realize the implications of such arrangements until they attempt to take legal action against their employer or a coworker.

“I think they probably tend to resent it,” she said. “I’m not sure they realize what they’re giving up until they have an attorney telling them, ‘you won’t have the option for a jury to find in your favor.’ “

The recent court ruling is a clear victory for California businesses, but the state could still appeal the decision to the Ninth Circuit or to the California Supreme Court.

“My hunch is they aren’t likely to appeal,” Spencer said. “It’s an uphill battle and not necessarily worth their resources.”

Authored by former Assemblywoman Lorena Gonzalez, D-San Diego, AB 51 was originally promoted to target the MeToo movement. It was characterized as an anti-sexual harassment law, as many sexual harassment claims against employers have been kept from public view by resolutions in private arbitrations rather than in public court proceedings.

The legislation has faced years of litigation. It was scheduled take effect Jan. 1, 2020, despite a Dec. 6, 2019 lawsuit filed by a coalition of businesses led by the California Chamber of Commerce that opposed the measure.

U.S. District Judge Kimberly Mueller issued a temporary restraining order on Dec. 30, 2022, followed by a Jan. 31 ruling that halted enforcement of AB 51 and invalidated the law.

“This is a win for all Californians,” California Chamber President and CEO Jennifer Barrera said in a recent statement.  “Until there is meaningful reform to our litigation environment, arbitration remains an efficient, cost-effective way to resolve disputes in a timely and fair manner for both employers and employees.”

The Chamber has argued that AB 51 would have resulted in more litigation, while imposing significant delays in California’s justice system with increased costs for businesses and workers.

Some firmly disagree with that assessment.

In a 2015 analysis, the Economic Policy Institute said such agreements permit corporations “to write the rules that will govern their relationships with their workers and customers and design the procedures used to interpret and apply those rules when disputes arise.”

“These clauses appear to be innocuous, or even beneficial, to consumers and employees, but they pack a powerful punch,” the institute said. “Consumers and employees are required to take their complaints to a privatized, invisible, and often inferior forum in which they are less likely to prevail.”

And if they do, they are less likely to recover their due, the institute said, adding that once a dispute is decided by an arbitrator, there is no effective right of appeal.

One judge characterized arbitration agreements as a “get out of jail free” card for corporations, adding that they undermine decades of progress in consumer and labor rights.

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